THE simmering conflict between a wide spectrum of industries and the government over the gas infrastructure development cess has the potential of blowing up into a full-scale battle in courts.

The Finance Act 2014, approved by parliament, incorporated all measures proposed in the budget 2014-15. The government lifted maximum ceiling on the GIDC, which, it believes, will help it collect Rs145bn through the cess during this fiscal year, up Rs57bn from Rs88bn last year. Industries had been cautioned about the raise.

Analysts say the government had originally proposed to raise the GIDC by a substantially higher amount for various sectors in the budget 2014-15. However, after an outcry by industries, the rates were significantly toned down in the amended budget proposals.

“While higher GIDC will likely impact all major manufacturing sectors, including cement, chemicals, textile and petrochemicals, most sectors either have the pricing power to pass down the impact or the actual increase in the cess rate is not significant to warrant an earnings revision,” an analyst asserted.

Fertiliser units affected by the cess hike are engaged in talks with the finance ministry, arguing that the government could not apply GIDC on new plants as they were categorically exempted from it under the Fertiliser Policy 2001

Iqbal Ibrahim, chairman of Orient Textile Mills and a former chairman of the All Pakistan Textile Mills Association (Aptma) vehemently disagrees. “The increased cess would burden larger textile units by Rs200 to Rs250m, and the smaller units by Rs150 to Rs180m”, he told Dawn. He estimates that the energy costs for a textile composite mill will increase by around 15pc, making Pakistani exports uncompetitive against regional rivals China, India and Bangladesh.

Ibrahim lamented that the export-oriented textile sector, which has already been hit by the rupee’s appreciation, will also be deprived of advantages that would have accrued due the GSP Plus status. “Just to retain them, I am selling my products to a couple of foreign customers at below cost.” But he asked, “For how long will I be able to keep that up”. He thinks the problem is that the government’s relevant financial arms, such as commerce, trade and industry, are not on the same page.

Earlier in the week, Aptma members emerged crestfallen from their meeting with federal textile minister Abbas Khan Afridi, who flatly told the textile lobby that the government was in no position to take back the GIDC hike. One textile tycoon thinks the finance ministry is quick to make commitments with the IMF for short-term gains, without realising the adverse long-term implications. “All industries that will suffer the blow will, as a last resort, knock at the door of the courts.”

But for all that, the Finance Act FY15 had two big surprises in store for new fertiliser plants, like those of Engro Corporation’s Enven and of Fatima Fertiliser. First, the government has decided to do away with the exemption granted to new fertiliser plants from any tax/cess on concessionary gas prices for 10 years for feedstock gas, which it had promised to sponsors at the time of the investment. Second, the cost of fuel stock has been raised to Rs150 per mmbtu.

People in the know of things say the the fertiliser units that would suffer the brunt are already engaged in talks with the finance ministry, arguing that the government could not apply GIDC on the new plants as they were categorically exempted from it under the Fertiliser Policy 2001.

“All we ask for is the government to honour its commitment,” Ruhail Mohammad, President and CEO of Engro’s flagship Engro Fertiliser, told Dawn. He recalled that the company was given the assurance of gas supply for 20 years, with the first 10 years at concessionary rates. But that was not to be. Ruhail complained that Enven — Engro’s $1.1bn plant at Daharki, Sindh, with a production capacity of 1.3m tonnes, has suffered perennial gas supply problems, and the cess would inflict further damage.

He reminded that Engro had bought the gas at auction, paying about $100m in 2007. He also recalled that under the fertiliser policies of 1989 and 2001, the government had held out commitments for concessionary gas for 10 years to two units of Fauji Feritiliser, one of Fauji Fertiliser Bin Qasim, one of Fatima Fertiliser and two of Engro.

“While the government fulfilled its commitment to those units that were offered gas under the Fertiliser Policy 1989, the promises remained unfulfilled in case of Engro’s plants. The cess on top of the huge payment of financial costs of the new plant is clearly a stumbling block in doing business,” he said, before asserting that the broken promises could decrease Engro’s ‘comfort level’ for other huge investments in the pipeline.

Shajar Capital analysts stated that in order to stave off a hit on their bottom lines, fertiliser companies may have to increase urea prices by around Rs60 per bag, while some other analysts put this figure considerably higher.

Published in Dawn, Economic & Business, July 7th, 2014